AP 14-7 (Corporate Surplus Distributions) Grado Ltd. is a CCPC with a December 31 taxation year end. The company was incorporated in 2013. All of the existing shareholders are individuals. The company's condensed balance sheet, prepared in accordance with generally accepted accounting principles (ASPE), as of December 31, 2021 , is as follows; \begin{tabular}{lr} \hline Total assets & $858,000 \\ \hline Current liabilities & \\ Long-term liabilities & $122,000 \\ \end{tabular} Shareholders' equity: 700 preferred Class A (paid-up capital) 1,000 common shares (paid-up capital) Retained earnings \$ 14,000 Total equities 87,000 251,000 $858,000352,000 (i) Mrs. Wiebe owns 100 of the common shares. She purchased the shares for $18 a share in 2014. The company redeems these shares for $90 per share in June 2022. (ii) Mrs. Wilbury purchased 200 of the Class A preferred shares for $36. The company redeemed all of her shares in September 2022 for $25 per share. Assume that she owns no other shares in Grado and has no capital gains in 2022. Required: Determine the income tax consequences of each of the following independent transactions. Income tax consequences are considered to include the amount of taxable dividends, the dividend tax credit, any taxable capital gains and allowable capital losses, and any changes to the ACB of the relevant property and the paid-up capital (PUC) of a class of shares. Assume that any dividends paid or deemed to be paid by Grado Ltd. would be non-eligible. A. (i) Mr. McDuff holds $200,000 of the currently outstanding long-term liabilies. The debt does not allow Mr. McDuff the right to convert to shares, but in an effort to restructure the company made a proposal to Mr. McDutf to convert to preferred shares, which he has accepted. Given the favourable terms and conditions, it is estimated that the value of the debt is $230,000. Grado will create a new class of preferred shares (Class B) that will be used to make the conversion. Grado will issue 500 Class B preferred shares that are redeemable at the option of the holder for $460 each. Assume that the PUC of the Class B preferred shares increased by $230,000 as a result of the conversion. (ii) Using the same facts described in A(i), explain what would have happened had Grado not created a new class of preferred shares to make the conversion with the debtholder but instead issued \$230,000 of existing Class A preferred shares. Assume that 2,300 of additional Class A shares would have been issued on the conversion. B. The company declared and distributed a 15% stock dividend on the common shares. The PUC of the common shares increased by $35,000 with a corresponding reduction in retained earnings. C. Mr. William Bristle owns 25% of the common shares, which he acquired in 2015 for $60 each. In April 2022 the company announced that there would be a distribution to all common shareholders following the shutdown of one of its operations. A payment of $68,000 was made shortly thereafter, with $57,000 of that distribution considered a partial return of capital li.e. PUC). In early December 2022 Mr. Bristle decided to sell all of his common shares to an arm'slength individual who agreed to pay him $100 per share. D. (i) Mrs. Wiebe owns 100 of the common shares. She purchased the shares for $18 a share in 2014. The company redeems these shares for $90 per share in June 2022. (ii) Mrs. Wilbury purchased 200 of the Class A preferred shares for $36. The company redeemed all of her shares in September 2022 for $25 per share. Assume that she owns no other shares in Grado and has no capital gains in 2022. AP 14-7 (Corporate Surplus Distributions) Grado Ltd. is a CCPC with a December 31 taxation year end. The company was incorporated in 2013. All of the existing shareholders are individuals. The company's condensed balance shest prepared in accordance with generally accepted accounting principles (ASPE), as of December 31 2021, is as follows